How to Calculate ROI and Why Is It Important?

By Sakshi Srivastava - 22 Mar 2022 Last Updated: 20 May 2022
How to Calculate ROI and Why Is It Important?

Return on Investment (ROI) is the most important financial metric for determining the likelihood of profit on investments. It is a cost-relative proportion that compares the profits or losses from an investment. Because it compares investments, ROI is very useful in evaluating investment returns.

The rate of return in business is measured in terms of cash flow and returns on investment. Internal rate of return and net present value are used to calculate it. These are the metrics used to compare various options. This is expressed as a percentage, giving an idea of the investment's outcome.

In this blog, we are going to talk about ROI and its importance.

Let’s Recognize the ROI

In general, ROI refers to the returns that a company receives from its investments. These returns are generated by the assets or projects. ROI is shown as a percentage because it is simple to understand. It is a numerical return, and these numbers can be expressed as positives or negatives.

If an entity's ROI is positive, it means that the return numbers outnumber the investment numbers. If, on the other hand, the returns are negative, it means that the business may suffer a loss as a result of the particular investment. In other words, it is simply a loss for the investor's investment. The total outcome of investments should be taken into account for accurate results.

How to Calculate ROI?

To calculate the ROI, simply divide the result of the investment by the total amount spent on the investment project. The resulting figure will give you the returns that you calculated. If the resultant number is positive, you made a profit on your investment; if the resultant number is negative, you lost money.

The ROI calculation formula is as follows

ROI = Net Return on Investment / Investment Cost * 100%

Let us look at an example to better understand this. Consider a small business that made an investment in purchasing business software in order to increase profits.

The formula is represented as follows

Business profit after software purchase = software cost/total cost of software

This formula is easily applicable to various types of business and can also be used to return earnings on business departments. It can be used in the Human Resources, Finance, or Operations departments. Finding the returns on investment can be difficult in large-scale businesses where expert advice will assist you in getting the right answer for the investments.

Non-monetary factors are not taken into account when calculating the ROI. Overhead costs, fees, and other factors can all have an effect on your ROI. Return on investment will consider how much time you spent on software, usage of software, life, tenure durability, multiple access systems, and other factors. Similarly, other types of business investments should consider these factors when calculating return on investment.

Implementation of ROI

There are several advantages to ROI, the most important of which is determining the returns on investment. The majority of businesses use ROI to determine their survival and success. If you discover that your investment is not producing satisfactory results, you must make a business decision about whether or not to continue investing.

ROI aids in business decision making, which includes the following

  • Asset acquisition
  • Decisions on employment
  • Business expansion
  • Decisions in business
  • The status quo

Asset Acquisition

Businesses can decide whether or not to purchase the assets. A business unit can decide whether or not to purchase an asset based on the returns calculation. The company can properly allocate its investments. The business can decide whether to purchase or rent the assets.

Decisions on Employment

The ROI can be used to determine whether to increase or decrease staff by hiring new employees. The salaries paid to employees can be used to calculate the employees' contribution to the business. If an employee is not producing as expected, the company can choose between expanding or cutting costs. It can take the form of promotions, pay raises, or firing employees.

Business Expansion

Businesses can decide to expand their operations or add new departments to their operations. It is a wise decision to expand business operations or branches. Calculating ROI departmentally will allow the company to determine the scope of business unit expansion.

The Status quo

It aids in determining the current state of the business. If a company has made large investments in assets, it can determine whether or not the investment is yielding good returns. It will aid in increasing the company's sales target. Tracking production in units can be simple and inexpensive. It will provide an idea for business profitability and success.

Conclusion

Understanding the significance of ROI is critical for businesses, as it will help in decision making. Decisions on hiring a new manager, purchasing a new asset for the business, business expansion, and any other cost decision can be made quickly. Dhanguard will help in understanding of ROI which will help businesses in their expansion, growth, and success.

For more information contact Dhanguard we will assist you with all aspects of the ROI in UAE.

Investments is made simple and hassle-free with Dhanguard in Dubai, UAE. We provide you various investment options like Index Fund, Gold, Mutual Fund, Stocks, SIPs, Bonds, Fixed Deposite, Sukuks with the minimum possible trouble including paperwork & payments.

By Sakshi Srivastava

22-Mar, 2022

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